Monday, January 28, 2008

Redlining laws and their dark side

For years redlining has been illegal. But could those laws now have an unintended side effect? For now we cannot quarantine a small area where homes are being defaulted up. Legally, the smallest area that can be quaranteened is a county, but in some states you must make it the entire metropolitan region to avoid redlining laws if that is what is required to cut loan losses.

It was after some further reading that I realized something about the Countrywide categories; They are structured by large regions to comply with redlining laws! In some states, they can have one county a Category 1 or 2 and another a 4. But in many areas, if they do not declare an entire metropolitan area to be of risk category, than none of the region can be a risk category.

I think these well intended laws will instead help constrict credit very quickly. Instead of slowing the trade up chain, it will cut it off. The 5% extra down-payment requirements will grow to 10% extra... Until the 25% down payments I've been predicting become reality. Remember, during the darkest times of US history, 50% down payments were required.

DC and LA are probably the best two examples of this I could find. Both are labeled as "4's." But should the multi-country region of DC all be a 4? Probably not today. But how can Countrywide differentiate legally? Since they cannot, even the cities with low defaults are all now lumped in with the high risk cities. Since this increases the down payment required, this will drop the prices of all homes in the region until you get up to price points were mortgages aren't typical.


Countrywide's categories:
https://www.cwbc.com/ContentManaged/files/SoftMarkets.pdf

Conclusion: "We're all subprime now." ;)

Got popcorn?
Neil

5 comments:

Anonymous said...

Countrywide is painting this same very broad brush when it comes to freezing HELOCs, as well.

Only with the HELOCs, this may constitute a Breach of Contract. According to their HELOC Agreement, Countrywide can restrict or suspend a HELOC if the Real Property securing the HELOC has declined significantly in value. But Countrywide is freezing HELOCs based on isolated and sporadic incidents of decline in value within large geographic areas, ignoring whether an individual property is declining in value or not.

When pressed in some of these cases to provide documentation of a specific property's decline in value, Countrywide has refused to do so - repeatedly.

Anonymous said...

Countrywide and other lenders are unnecessarily freezing assets on borrowers with high credit scores, verifiable adequate income levels, and more than adequate home equity to secure their HELOCs because some property values may be declining within a large geographic area.

This is money that will no longer be pumped back into the economy, so any benefit derived from the very small tax-rebate stimulus package will be eclipsed by the much larger hundreds of thousands of frozen HELOCs monster.

Add to that, many of my clients use their HELOCs to pay those lump sum college tuition/R&B payments every semester. Now, they're screwed. Their college student kids may be screwed, too. After all, the college loan and grant programs in existence now can't pick up the slack for the hundreds of thousands of frozen HELOCs.

Who is going to fix this mess?

geekiefreak said...

Dear Senator Diane Fienstien and Congressman Cardoza,

Once again in life as a 100% service committed veteran due to PTSD I need your assistance. I am attempting to buy a home with my V.A. loan benefit and through Wells Fargo Bank. I am encountering some issues that have appear to involve discrimination due to the fact I have a psychological disability. I have been in the process of buying this home since July, 2008 to present and have met every requirement they have requested. Now I am encountering problems again after meeting the requirements for their conditional approval that have regressed to issues they already addressed two months ago regarding my debt to ratio income. They have also not included my son's social security benefit due to the fact my mother is the payee representative on the account although that income is relative. I will contact the local congressman Dennis Cardoza regarding this matter. You have assisted me in other matters in the past as a R.O.T.C. student during the tale hook era and during periods of needing my rights protected in the V.A. System. I request and value your help once again and you always have my support and vote.


Since we have been in the process of trying to buy the home my some and I have become displaced because of the fact we were told we would close escrow several times. This has been a very difficult experience and continues to be difficult for myself and my twelve year old son Thomas.

I look forward to hearing you.

Sincerely,

Tina Landrith

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